Britons with rising debts can request a two-month deferral after the two-year-under-draft proposals went into effect today.
The so-called “Breathing Space” program, announced in 2019 after a five-year campaign by charities, allows debtors to request a break in any creditors’ enforcement actions and freeze interest and fees.
The 60-day break from the credit spiral and the risk of debt collection agencies being sent around is designed to give borrowers a chance to identify their financial situation and options that could help them get out of debt.
Push the red button: the government’s new Breathing Space program gives problem debtors a 60-day break from interest, fees and enforcement action
Prospective applicants can ask a debt counselor or charity to stop the clock if they meet the criteria. You must not be in debt relief or have an individual voluntary arrangement or be bankrupt when you apply.
Meanwhile, not all debt is included, even if all creditors are told that someone has been unable to make payments for two months, which could affect their creditworthiness.
This is because, unlike the three-month mortgage and credit card payment holidays introduced by the Financial Conduct Authority last year, this 60-day hiatus appears in the credit records.
“It stopped the phones ringing and helped me sleep at night.”
Jamie, 26, from Sheffield benefited from a month-long hiatus from his creditors a few years ago, which he arranged after seeking debt advice.
Originally from Wakefield, West Yorkshire, Jamie ran into financial difficulties in 2014 after being fired from his job and having to take care of his mother.
He ran into roughly £ 2,000 in debt on three credit cards and an overdraft that he couldn’t afford to repay with a combination of benefits and a badly paying job, and was collecting interest.
Eventually it was passed on to debt collection agencies who bombarded him with calls at work. He then turned to the StepChange charity.
He signed a debt management plan that combined his debts into one monthly payment and was able to give his creditors a month of respite.
“Some were happy to give me a month, but I had to give them a StepChange reference number, others weren’t that concerned,” he said, despite taking a 30-day break with the charity’s help.
“This month I used it to restore my sanity and to stop the phone from ringing. I haven’t slept and have not been bombarded with calls afterwards. I found out what I can pay for. ‘
Although the break helped, he said he would have liked it longer.
“I would definitely have preferred three months or so,” he said, “30 days isn’t always great, it’s just a paycheck. It gives you time to plan, but not really to get you back on your feet. ‘
Fortunately, Jamie completed his DMP about 18 months ago and now has another job, improved credit, and no credit card debt.
“I took out a lower limit card but quickly closed it,” he said. “In this situation, you understand the implications.”
Debts that are not covered by any arrangement include secured loans such as a mortgage or second loan, or an advance on universal loan payments owed to the Department of Labor and Pensions.
Those who use the system are also expected to maintain housing, council tax and utility payments during the two-month respite. If they don’t, it can also be canceled.
The Treasury Department estimated that up to 700,000 people could benefit from the system in the first year of operation.
Minister John Glen wrote in a blog post for the debt relief organization StepChange in February 2020 that this “could help people develop an affordable long-term plan so they don’t have to rely on quick fixes or expensive credit”.
The rollout comes as the number of UK adults with problem debt was 2.4 million in January thanks to the January pandemic, according to StepChange. About 14.3 million people saw their income decline due to the coronavirus, of which 11.3 million said their income had not recovered.
What debt solutions are there?
Here are some of the terms readers should know to get the debt conversation started:
– Debt management plan: an informal arrangement to repay non-senior debt (excluding taxes and council tax) in one monthly payment for those who aren’t struggling so hard that debt needs to be written off. Interest and fees on debts are often frozen. They can be free or paid
– Insolvency: For those who owe at least £ 5,000 and cannot repay it. It costs £ 680 and means someone will not be able to repay their senior and senior debt.
– Debt relief: Anyone who owes less than £ 20,000 and has less than £ 50 a month and is unable to pay their debts can file one of these applications. These numbers could be changed to £ 30,000 and £ 100 at the suggestion of the Bankruptcy Service.
It comes with an upfront fee of £ 90 which regulators have warned that for some it is a “significant barrier”. It usually lasts a year and can write off the debt it contains.
– – Individual voluntary agreement: These have grown in popularity in recent years due to fear that they would be mis-sold as “Life Hacks”. These charge an average of around £ 5,000 upfront fees and require borrowers to have signed formal and legally binding debt settlement plans that can last five to six years.
They are usually only recommended for those with a debt greater than £ 10,000.
Source: Citizens Advice
The charity’s executive director, Phil Andrew, described the move as a “landmark law” with “real potential” to “put people who seek debt counseling on the path to recovery.”
He added: “It is very much to be welcomed that people who take action to deal with their debts are finally receiving legal protection that has so far been voluntary and offered by some, but not all, of creditors.”
The 60-day freeze is the first in a two-part government proposal included in the Conservative Party’s 2017 election manifesto to help people struggling with their debts.
A “statutory debt settlement plan” will follow in 2024, which will allow debtors to enter into a legally binding agreement to repay their debts.
This is followed by an announcement in the March 3 budget that the government will allocate £ 3.8 million to pilot an Australian-style interest-free loan system for distressed borrowers.
This move was cautiously welcomed by community lenders and charities, though they said questions remained about how it would work.
Some also expressed concerns about the effectiveness of the new system due to its limited duration, and the fact that debt counselors can often defer credit card and loan debt for a similar amount of time.
Sara Williams, a debt counselor who runs the Debt Camel blog, told This is Money, “The debt counselors wanted the program to last six or twelve months.
“That would have given a lot of people enough time to find another job or settle repayments for their priority debts.
“But the current two-month respite just isn’t long enough to be useful in many cases.”
Amy Taylor, a debt counselor and chair of the Greater Manchester Money Advice Group, said: ‘If part of our advice is getting a customer to get benefits, it will likely take much longer than 60 days to see an improvement in income. The time frame for disability benefits is currently around six months.
‘There are other problems, like changing the dynamics between the client and the debt counselor. We’re here to provide independent advice, representation and information, but it requires debt advisors and clients.
“The client has to get involved on a regular basis, keep paying his bills, borrowing no more than £ 500, and if he doesn’t meet these conditions, debt counselors can effectively end the respite.
“This is not how I work as a debt counselor, and I believe it undermines the trust on which the counselor-client relationship is built.”
She added, “At the end of the program, the client’s circumstances may not differ and there is no specific debt solution to go to. Breathing in itself is not a debt solution. It’s just a break. ‘
Williams added, “Many people who talk to a debt counselor about a two-month hiatus may find that the debt counselor suggests better options to them. There may be a good debt solution for you that you can get started with right away.
“Or it may just be necessary to speak to one or two creditors and ask for your account to be suspended while you get back on your feet.”
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